VC on the rise: State bucks national trend, sees investments increase

MICHIGAN — Venture capital investing in Michigan had one of its best years ever in 2012, setting the stage for what one venture investor sees as “another very big year” for further growth.

Investors put $232.31 million into 47 deals in Michigan last year, surpassing pre-recession levels and easily exceeding the $84.75 million invested in 36 deals in 2011, according to the quarterly MoneyTree report from the National Venture Capital Association and PricewaterhouseCoopers.

The 2012 activity positions the state well for the future, said Dale Grogan, co-managing director of the $15.1 million Michigan Accelerator Fund I in Grand Rapids.

“There are several funds that have money to invest, which means that capital is available. There is some really great innovation that is coming from all three sectors of public institutions, existing companies and startup companies. That trend should continue for 2013,” Grogan said.

The 2012 totals represent the third best year for venture investing in Michigan since the quarterly MoneyTree report started in 1995. The year was exceeded only by the $356.44 million put into 55 deals in 2000 and, in terms of just dollar value, the $253.47 million invested in 44 deals in 1999.

More than half of the money invested in Michigan last year went into three companies: $72.64 million for Protean Electric in Auburn Hills that’s developing drive systems for electric and hybrid vehicles; $32.5 million to EcoMotors Inc. in Allen Park; and $16.44 million to medical device company CertoPherx Inc. in Ann Arbor.

West Michigan-based companies that received venture funding in the fourth quarter were:

• Tolera Therapeutics, a Kalamazoo drug development company that received $5.41 million from Hopen Life Science Ventures in Grand Rapids, the Kalamazoo-based Southwest Michigan Life Science Venture Fund, and Cincinnati, Ohio-based Triathlon Medical Ventures.

• Intervention Insights Inc., a Grand Rapids company that provides genetic tests that are designed to match cancer patients with drugs that will best treat their tumor. The company, spun out of the Van Andel Institute, received $1.6 million from undisclosed investors, according to the MoneyTree report.

In reviewing the 2012 MoneyTree data, Sam Hogg, a partner at Open Prairie Ventures that manages the Southwest Michigan Life Science Venture Fund, noted a “very noticeable uptick in the number and quality of investments in the $10 million range, basically B or C rounds of funding.”

Hogg attributes that to “an increasingly vibrant technology and talent landscape in Michigan that can be linked back to the state really investing in technology businesses five, 10 years ago via the 21st Century Jobs Fund.”

“Every state wants a technology industry but few are willing to invest and wait the length of time it takes for it to take shape. I think we are seeing just that here in Michigan, so kudos to the folks that fought hard for those programs then,” Hogg said.

Eight of the 47 deals in Michigan were for $9 million or more, including the $9.2 million that five investors put into Kalamazoo-based Vestaron Corp., which has developed an insecticide using spider venom.

Despite the gains over the years, VC investing in Michigan remains in what Grogan calls a “nascent” stage compared to other states, especially on the coasts, because “we simply don’t have as much money to put to work.”

Still, Grogan said, there is more venture funding available in Michigan than ever before. Investors have increased confidence in Michigan’s economic resilience, and “there is an awaking of entrepreneurs and outside investors alike that now is a good time to nurture Michigan investments,” he said.

Grogan noted the growing number of venture funds from outside of Michigan, Open Prairie included, that now have offices in the state.

“They are here for a simple reason: There are opportunities in Michigan that are attractive,” Grogan said.

As of a year ago, Michigan was home to 20 venture capital firms, up from 15 just three years earlier, according to the Michigan Venture Capital Association’s 2011 annual report. Another seven firms based elsewhere have an office in Michigan.

In the life sciences sector alone, VC investments in Michigan totaled $107.1 million through 16 deals last year, which compares to $30.8 million in 16 deals in 2011, according to Cleveland-based BioEnterprise, a biomedical accelerator that tracks biotech and health care venture investing in the Midwest. In terms of dollar value, the amount was the best year for VC investing in life sciences in Michigan since before the recession.

Most Midwest markets saw increases in VC investing in life sciences during the year, a contrast to the sector nationally.

“As with the rest of the country, Midwest health care investing fell dramatically in 2009 after strong years in 2007 and 2008, but it appears investors are again optimistic about Midwest deals. 2013 should be an interesting year to watch,” BioEnterprise interim President Aram Nerpouni said.

Nationally, VC investing in life sciences declined to 466 deals for $4.1 billion, a 15-percent decline in dollar value and flat deal volume. Much of the decline occurred in first-time financings for young companies, an area that saw the lowest activity since 1995, according to the MoneyTree report.

Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, attributes the decline to regulatory uncertainty, plus the heavy amount of capital and the decade or more it takes to move a life science innovation from concept to the marketplace.

“All of these factors have been taking their toll on investing in this space, even though everybody acknowledges there’s still tremendous opportunity,” Lefterhoff said.

Investing in the medical device industry alone declined 13 percent nationwide to $2.4 billion through 313 deals, which was down 15 percent from 2011.

In Michigan, the increased investment activity came as the venture capital industry overall declined nationally.

Across the U.S., venture capitalists invested $26.5 billion in 3,698 deals, a 10-percent decline in dollar value and a 6-percent decline in deals from 2011, according to the MoneyTree report.